Agilent Technologies, Inc. (A) Q3 2020 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Agilent Technologies Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. And now, I'd like to introduce you to the host for today's conference, Ankur Dhingra, Vice President of Investor Relations. Sir, please go ahead.

Thank you, Robert, and welcome, everyone, to Agilent's conference call for the third quarter of fiscal year 2020. I hope that all of you and your families are safe and healthy. On the webcast today are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining for the Q&A after Bob's comments will be Jacob Thaysen, President of Agilent's Life Sciences & Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of Agilent CrossLab Group. You can find the press release, investor presentation and information to supplement today's discussion on our website at investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year, and revenue growth will be referred to on a core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. We will also make forward-looking statements about the financial performance of the Company. These statements are subject to risks and uncertainties and are only valid as of today. The Company assumes no obligation to update them. Please look at the Company's recent SEC filings for a more complete picture of our risks and other factors. And now, I would like to turn the call over to Mike.

Thanks, Ankur, and thanks, everyone, for joining us on our call today. The Agilent team delivered excellent results in the third quarter in the midst of a historic global pandemic. Against this backdrop, Agilent's performance once again highlights the strength and resiliency of our team and our business. Agilent's Q3 revenues are $1.26 billion. Our revenues are down just 1% on a reported basis, despite COVID-19 headwinds in what we expect to be the year's most challenging quarter. On a core basis, revenues are down 3%. These results demonstrate the strong resilience we have built into our business over the past several years. EPS is $0.78 per share. This is a 3% year-over-year increase. Operating margin grew 90 basis points over last year to 23.7%. Our Q3 results are further evidence of the success of our profitable build-and-by growth strategy. We continue to build a more resilient growth oriented business. Last quarter, I talked to you about the four key priorities we're focused on during the COVID-19 pandemic: Protecting our people; being open for business for our customers; taking decisive action to deliver our P&L and balance sheet; and unwavering commitment to growth. Staying focused on these priorities has helped us navigate through the COVID-19 effects on our team, customers and business. Our customers continue to respond very favorably to our team's engagement and enhanced digital capabilities. In fact, Q3 customer satisfaction rankings are at all-time highs. In all regions, we're seeing improvement in lab access for our customers and increase non-COVID-19 testing volumes. There are, however, regional and end-market differences in the pacing of improvement. Labs access improved through the quarter, although still not at pre-COVID-19 levels. Globally, lab access remains limited in academia, non-COVID-19 research and testing labs. We're also seeing continued limited access at some private sector research labs in Europe and United States. Similarly, non-COVID-19 diagnostic testing volumes improved throughout the quarter, but remained down from prior levels. Hospital access in Europe and the U.S. is improving, although disrupted at times by virus flare up. While there are indications of improvement in economic growth at varying degrees across the globe, caution remains at customer capital expenditure decisions. Consistent with our thinking coming into the quarter, the pace of recovery varied by region. As expected, China led the way for us and exceeded our expectations with revenues up 11%. China's growth in the quarter is broad-based across all end market and for all business groups. While improving the rate of recovery in Europe, and the Americas lags China, given the timing when these reasons first felt the brunt of the pandemic, European revenues are down 5%. Americas market conditions trailed both China and Europe with revenues declining 10%. However, as we exited the quarter, we are seeing signs of improvement in service activity, consumables and diagnostic testing volumes. On a total Company basis, we exited July with modest growth across all major markets. Now, let's talk about our performance by business groups. Our Life Sciences and Applied Markets Group grew 2% on a reported basis and declined 4%. Our team is focused and determined to gain market share despite a constrained capital environment. The strength of our portfolio coupled with an energized and stable sales team is paying dividends. I'm also very proud of contributions are selling our cell analysis technologies are making in COVID-19 virus research. Our M&A strategy is working and making a difference in the pandemic fight. Our CrossLab Group revenues grew 1%. Increase in customer activity led to increased sales of consumables and an uptake of on-demand services. The CrossLab team continues to win large, multiyear contracts for enterprise laboratory management that will benefit us moving forward. We will continue to increase our competitiveness in this space. Our Diagnostics and Genomics Group revenues declined 8%. While our overall pathology and genomics businesses are down for the quarter, we did see gradual improvement in diagnostic testing volumes and non-COVID-19 lab openings. Partially offsetting this, our nucleic acid solution business delivered another strong quarter, growing almost 25%. We are very excited about the future of our NASD business. As we announced earlier today, we plan to more than double oligo manufacturing capacity and our new Frederick, Colorado site. This expansion helps us meet significantly increasing customer demand. We are growing double-digit and expect to continue this rate of growth in the coming years. We continue to advance in our portfolio across all our businesses. Highlights during the quarter included LSAG launching two new LC/MS products in Agilent 6470B Triple Quad and the Agilent RapidFire 400 systems. Both products are in high throughput labs, driving productivity and superior resolution. We launched our CrossLab Asset Monitoring service, which is a new subscription service using instrument sensor technologies to provide data driven usage insights. This helps drive improved customer economics and lab productivity. While early, we are seeing strong interest from customers in this service. During the quarter, our PD-L1 assay was approved by the FDA for expanded use of non-small cell lung cancer, helping guide physicians in selecting treatments using specific immunotherapies. Our team is very proud of the role their company is playing in the global COVID-19 play. We are supporting COVID-19 research, testing and therapeutic of vaccine development. Our efforts in the global fight against the virus delivered 2 percentage points of reported growth. We are accelerating efforts to make a difference in the battle against COVID-19 and have mobilized across Agilent team to maximize customer support. Let me close with few comments on our outlook in the coming quarter. While there's still significant uncertainty regarding the continued pace of recovery, we expect the July trend of gradual improvement in our business to continue into Q4. By region, China will continue to be a positive story for us and lead return to growth. Europe is starting to trend upward. The Americas are also expected to improve but at lower rate than China and Europe. Globally, improved lab access, increasing non-COVID-19 testing and a slowly recovering global economy are all positive signs. I remain absolutely convinced Agilent will emerge from this pandemic with a stronger position in the marketplace. Our continued focus action on four priorities, protect the team; support our customers; preserve our P&L and balance sheet; and our unwavering investment in growth are delivering. Entering Q4, we are operating from a position of strength and with momentum. Yes, this pandemic remains unpredictable. However, I am cautiously optimistic about our continued gradual recovery and return to growth. Before I hand the call over to Bob, I'd like to pause and share my hope that you and your loved ones are staying safe and healthy. Thanks for being on the call. I look forward to taking your question after Bob's remarks. And now, Bob, over to you.

Thank you, Mike, and good afternoon, everyone. Today, I'll provide some additional detail on revenue, walk through the third quarter income statement and some other key financial metrics. And then, I'll finish up with a framework for thinking about Q4. As with last quarter, there are still too many unknowns. So, we're not going to provide formal forward-looking guidance today. However, we will provide a framework for how we see things potentially playing out in Q4. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike mentioned, our revenue for the quarter was $1.26 billion, down 1% on a reported basis. On a core basis, revenue declined 3.1% in the quarter, currency negatively affected revenue by 1.3 percentage points, while acquisitions added 3.4 percentage points to growth. As Mike talked about the regional performance, I'll speak to the end-market performance. In terms of our end markets, pharma grew 2% in Q3 against a very strong comparison of 13% from last year. Both, small and large molecule applications grew and biopharma improved throughout the quarter as drug development labs increased production and access. We experienced softness in diagnostics and clinical, as anticipated. Revenues declined 10%, primarily due to conditions in the U.S., driven by COVID-19-related disruptions to patient visits and diagnostic lab opportunities. Encouragingly, we did see an improvement in routine testing throughout the quarter, especially in China and Europe, while the U.S. lagged. Chemical and energy was down 10%, consistent with our thinking. Revenues were generally flat sequentially with conditions largely similar to what we saw in Q2. As we've talked about previously, we expect this segment to ramp more slowly than others. The food segment was a bright spot, up 8%. We're seeing ongoing signals that the market in China has stabilized with the transition of more testing by commercial labs. The food market was just one of several bright spots that contributed to double-digit growth in China, including growth in the low-teens for our pharma business. Our environmental and forensics business declined mid-single-digits against the double-digit compare and the academic and government segments declined mid-single-digits, while improving on a sequential basis in Q3. Strength in cell analysis and liquid handling for viral research partially offset the widespread impact of the ongoing academic lab closes. Now, let's turn to the rest of the P&L. I'm extremely proud of how the Agilent team has responded to the challenging environment. During the quarter, we continued our focus on managing expenses, while ensuring we continue to invest in our key growth opportunities. These expense management actions we initiated last quarter were on full display in Q3. In addition, our customer engagement model using digital tools continued to gain traction, while also delivering savings in SG&A. As a result, operating margins of 23.7% improved 90 basis points over last year on declining revenues. Gross margin at 55.1% was down 130 basis points versus the prior year, largely due to mix, and higher logistics costs. However, strong cost management and operating expenses more than offset the decline in gross margin. This combination of factors resulted in non-GAAP EPS for the quarter coming in at $0.78 per share, up nearly 3% from the number we posted a year ago. From a balance sheet perspective, we generated $290 million in operating cash flow during the quarter, which is $48 million improvement over last year. In terms of capital spending, we spent $25 million, lower than last year and in line with our revised look in Q2. We ended the quarter in a strong position with $2.3 billion in available liquidity, including $1.36 billion in cash. Also during the quarter, we took advantage of low interest rates and refinanced $0.5 billion in short-term debt with a 10-year bond and a 2.1% coupon, the lowest coupon in our portfolio. As you know, we paused share buybacks in Q2, pending improvement in business conditions. In Q3, our visibility into business trends and cash flow improved, and we resumed anti-dilutive share repurchases late in the quarter. In the quarter, in total, we repurchase 360,000 shares for $33 million. Going forward, we intend to resume our normal pattern of regular anti-dilutive repurchases, along with additional opportunistic buying. Our overall capital deployment approach remains balanced with the primary focus on growth M&A opportunities, while also returning the cash to shareholders via dividends and buybacks. As we look to Q4, business and trends have gradually improved, but significant uncertainty remains around the evolution of this pandemic. However, let me provide a framework for how we see a range of possible revenue growth scenarios in the coming quarter. We generally expected trajectory of gradual improvement in business results to continue across all regions. Areas where we see a broader range of scenarios include research spending, both in academia and other markets, non-COVID diagnostic testing, especially in the U.S., and the general CapEx environment. The combination of these factors could result in scenarios where our revenue performance could range from a 4% decline to 1% core growth. Also, as a reminder, the BioTek acquisition closed midway through Q4 of last year. So, the M&A impact in Q4 will be smaller than in previous quarters, roughly 1 point growth and currency is forecasted to be positive in the quarter. The low end of this range envisions COVID-19 flare-ups occurring in the fall in various geographies, limiting and in some cases, reversing the recovery gains we've seen in a period of time. In this scenario, one might expect to see slower or stalled improvements in research, academia and other markets as continued tight cash management leading to lower CapEx spending in the U.S. and Europe. We hope this bottom end of the range is overly conservative, but we wanted to let you know, we have plans in place in case this happens. The higher end of the range assumes continued recovery by region, building on what we have seen in July, with the biggest impact coming from the U.S. This would include a continual increase in elective medical procedures such as cancer screenings, as well as continued lab openings. This view would also include continued China momentum, along with the continued improvement in Europe and other areas in the Americas. Again, this is not guidance, but should provide a sense for some of the variables we see for Q4. Overall, I feel we are very well positioned to deal with this challenging environment, accelerate market share gains and come out even stronger as the global economy continues its path to recovery. With that, I'll turn over things to Ankur to direct the Q&A. Ankur?

Thanks, Bob. Robert, if you can provide the instructions for the Q&A, please?

Certainly. [Operator Instructions] Your first question comes from the line of Doug Schenkel with Cowen. Your line is open.

Hey. Good afternoon, guys.

Hey, Doug. How are you doing?

I’m doing well. Nice work in a tough environment. Can we maybe just start with a clean-up question right off the bat which is just about the prepared remarks. I don't think you quantified COVID-19 tailwinds in the quarter. Again, I may have missed that. But, it just would be helpful to get that so we could try to normalize there?

Yes. Sure, Doug. I touched on it briefly in my comments. So, there's two points of reported growth in Q3.

Okay. That’s great. And then, on China, just a couple, I'm just curious if you would share the exit rate. And as we look ahead, I know you're not guiding, I'm just wondering if you think based on what you're seeing, if you think that double-digit growth can be sustained, from here, at least a term. And then, specific on food, it’s great to see it return to solid quarter first time [Technical Difficulty] seeing some stabilization last quarter. Can the high-single-digit growth rate you saw this quarter be sustained moving forward, given favorable multiyear comparisons? Thank you.

Hey Doug. Thanks for those questions. So, just to make sure it came through the audience. The question was about our view on the growth rate of China for the rest of the year as well as can that high-single-digit growth rate in food be sustained. We think the answer is yes on both. We're really pleased with our performance in China. It was broad based. I tried to really accentuate that in my comments. We saw basically double-digit growth across all end markets in China. And we think that a double-digit growth rate is within the realm of possibility for Q4 in China. And I have to say, Doug, it's wonderful we talking about China food from a different vector. We've been talking about it probably last 18, 24 months of one that will return to growth. We saw some early indications in Q2, we saw strong Q3, and we think that are all numbers probably sustainable for the rest of this year. Want to say something, Bob?

Yes. I would just say, Doug, to add, I mean, one of the things that was very positive about China was it was pretty consistent across the quarter, and in fact exited slightly higher than that overall 11%, but we saw solid growth all three months.

Your next question comes from the line of Vijay Kumar with Evercore ISI. Your line is open.

Mike or Bob, just maybe on the guidance here. If I step back, the third quarter guidance, down mid-single to down mid-teens, this down low-single was up, came well above expectations I would say, perhaps not surprising than peers, but nonetheless solid execution. Maybe Q4, down 4 to plus 1 implies declines. What’s the cause of declines, just given in light of performance? Is that that the minus 4 at the low end, is that assuming that Life Sciences [Technical Difficulty]?

Yes. Vijay, this is Bob. I'll take that. And as I mentioned in the prepared remarks, we hope that that is overly conservative. What that would imply is actually a retrenchment -- and in COVID-19 flare-ups here in the U.S. as we go back -- as we move into the fall, and you start seeing some elements of shutdown. So, we certainly would hope that we would do better than that. But, we wanted to provide, hey, that's within the realm of kind of how we're thinking about our spending and so forth. Our July results -- or our exit rate of the quarter was much higher than that. And so, we're aiming to do better. But there's still uncertainty in the world with the pandemic, people going back to school and so forth, so.

And Bob, I think it’s probably fair to say, the wildcard is United States, right?

Yes, absolutely.

And we were encouraged by the movement in PMIs. You probably noticed that. But, let's see how that translates into business in the coming quarter. And again, we have to keep in mind ourselves, as pleased as we are with the result we just delivered, there's still a lot of uncertainty out there because the virus is unpredictable at times.

Yes. That's right, Mike. I mean, if you looked at each one of the major markets, each one of the major markets got better in Q3 versus Q2 with the exception of the U.S., which we expected given kind of the state of affairs with the pandemic.

That helpful perspective. So, the minus 4 implies that things get worse. Was July flattish or positive? And I'm curious Mike that you mentioned NASD doubling up a while ago. I know, if you turn back the page, we were doubling capacity. So, is this now versus six months of a quadrupling capacity versus where we were last year? Is that the right way to think about the revenues going from 100, 200 to perhaps, is that the math here?

No, it's slightly different math. I think, we've been consistent with our view of needing to double our capacity. What we ended up doing is actually triggering the decision to initiate expansion earlier than we thought, just given the robust nature of the end market. And as well as we have worked our way to be able to -- in the same space, we challenged ourselves to find ways to drive as much revenue in the same physical space. So, we are investing a little bit more capital than we initially thought. But, we're also building something slightly different than our first train, which is going to give us actually more volume than our current train A. So, it's a really -- we thought it was really positive signal. And that’s why sent out the press release this morning, because we're super excited about our prospects here.

Yes. And Vijay, let me kind of frame into kind of the numbers. What we were talking about is the Frederick site has the potential of roughly $100 million worth of revenue. And we added capacity that more than doubles that $100 million to give you a frame of the numbers. So, it's not 100, 200, 400, it's 100, 200 and more than 300 to kind of give you a sense. And in terms of July, we actually came in with growth across all three groups in exiting in July.

Your next question comes from the line of Tycho Peterson with JP Morgan. Your line is open.

I’ll start with the COVID commentary. I guess, if I go back to last quarter, there was some talk about launching the serology test. You guys obviously have an installed base of real-time PCR instruments. We've got the questions that why you haven’t launched a PCR test. So, can you just talk a little bit about, how you think about those tailwinds going forward and how you think about your capabilities on diagnostics side?

Yes. Tycho, I'll make some initial comments and then the group presidents are kind of quiet today. So, I’ll pull Sam in here as well, to provide his perspective. But, we think that there's still tailwinds in front of us and now two points of growth, and we think we can sustain that at a minimum. That's why I tried to put fairly bullish comments about our stepped up efforts across the Company. Some of these things are going to take a little bit longer. We think there's still room for our own test of quality tests with some different features. But, I think maybe a few comments there, Sam, from your perspective?

Yes. Sure, Mike. Hi, Tycho. As you -- I think you’d have seen a good pickup in terms of our qPCR instruments, which are our Aria systems, as well as our bioreagents related to qPCR both reverse transcriptase master mixes. On the antibody side, we’ve definitely also seen an increase in IgA, IgG and those antibodies. In terms of our own tests, we are very actively exploring the possibilities of developing those. So, more to share in due course.

And Tycho, I guess, what I’d just close off here is a broad-based nature of our portfolio is allowing us to play in multiple aspects of this COVID-19. Some of these things may take a little bit longer to actually turn into revenue, right? So, if you're working with, say, a pharma partner or something in the therapeutic area, it may take a while for that to come to market. So, we think these tailwinds are here to stay for some time. And we're stepping up our efforts here because it plays right into the broad nature of our portfolio.

I guess, that's a good segue on the NASD expansion. Could you maybe draw to what degree that's tied to the COVID vaccine, and any updates from your add-on capabilities on APIs for mRNA or siRNA vaccines?

Do you want to take that one, Sam?

Yes, sure. No problem. Tycho, I'd start by reiterating a little bit of what Mike and Bob were talking about. It's interesting that it was just last June that we did a ribbon cutting and starting of the new Frederick, Colorado facility. And quite frankly, we've seen demand that exceeded our expectations, just 12 months ago. So, building really -- sorry, the new manufacturing line that we're building, you can consider it, as we call it, training on steroids as our general. But, it is very-differentiated, both in throughput and the molecules it can do, which is a segue to your -- a little bit of your question that we're able to do multiple iterations or types of siRNA or RNA. We're also actively looking at other different versions of molecules that are oligo based. Though I can't reveal the details, we have had a lot of interest related to COVID-19, all of those used for either COVID-19-related therapeutics or even for vaccines. So, I can say that we have started to work on some of those programs now.

Yes. And maybe Sam to add. That being said, the capacity expansion isn't tied to COVID-19. We have plenty of demand outside of COVID-19 therapeutics and vaccines. And so, this is a broad-based capacity expansion.

And then, just last one, I know we don't have official guidance, but there's a framework for the quarter -- for the fourth quarter. As we think about C&E and then also pharma biotech, should we expect any kind of material change in either of those end markets for the coming quarter? I know, you talked about restoring activities for C&E. I wasn't sure if that was maybe a positive improvement in trajectory there?

Yes. Probably -- C&E is probably the one that's -- I would expect it to be pretty stable and that down 10ish percent -- 8% to 10% in that range. We do expect pharma to continue to improve. So that 2% certainly even in the low scenario would stay there and then on the high scenario would accelerate, which is consistent with the trends we've seen throughout the quarter of Q3.

And Tycho, the supply chain consideration and discussions still happen and it gets added a level of stability, albeit down to this -- into the space. And, again, as you look ahead for the future, this is an area where eventually it'll come back, and again, too early to call. But, I'd say we're pretty confident about the improvement rate in pharma.

Yes. The way to think about those reshoring is those are opportunities and discussions that could happen through the order book, and then will happen actually in '21 and beyond in terms of investments are being made. So, that's more future looking.

Your next question comes from the line of Puneet Souda with Leerink. Your line is open.

So, first question is just on NASD, [ph] it’s obviously strong in the quarter, but that would imply Dako and clinical business, obviously you pointed that out, it was down in the quarter. But that's a significant decline. Maybe just could you parse that out for us? What is -- it's the COVID impact, for sure, but is there anything beyond that in terms of the way market is fundamentally potentially shifting here to NGS maybe? And if you could just maybe elaborate a little bit of that, clarify? Thanks.

Yes. Happy to do so. So, it's all market, it’s all access to labs and patients going for the diagnostic test. So, it's real all market. I think, we're seeing different pace of pacing throughout the quarter. All of our geographies in the diagnostic testing front ended up with positive growth in July, but it was down sharply in May and June, particularly in the U.S. And keep in mind also, we -- part of our business in our genomics front is so select into NGS-based diagnostic labs and for genetic disorders, for example, those tests aren't getting done either. So, it's really all market.

Yes. I was going to say, Puneet, actually if you bifurcate those two and look at our performance, actually, pathology performed better than NGS testing volumes, given what Mike was just talking about, as well as some of the academic institutions.

That's good point, Bob. Thanks.

Yes. Thanks for that. And if you could, I know you quantified it last quarter, Bravo contribution. I was wondering if you can provide that for Bravo Magnis liquid handling system, sort of how much of that contribution happened in the quarter?

Yes. That's part of the story for our COVID-19 tailwinds. And I think probably the biggest contribution this quarter actually came from BioTek, Bob, if I remember correctly?

Yes. Between BioTek and Bravo.

Bravo. So, it's kind of like, now we like a one-two punch kind of going there on the core instrumentation. I’d also remind you, with the Bravo platform comes an ongoing revenue stream associated with the tips that go with those liquid handlers.

Okay. And last one on just ACG. I mean, could you just elaborate on -- in these times, you mentioned, there are some larger contracts -- service contracts and likes that you’re getting into. Sort of what are those sort of COVID-driven, what's behind those and maybe if you can elaborate on geography there?

Yes. Puneet, happy to have Padraig jumping on here and provide his perspective on that. So, Padraig, in the call script I talk a bit about the large enterprise deals you guys won. So, why don’t you talk about that a little more detail?

Yes. So, thanks, Mike. We launched our CrossLab Asset Monitoring service, which has seen a big uptick. And what we're seeing from customers is a large demand for sourcing from one vendor. And because of our capabilities in terms of the asset monitoring capability, relocation services and our core delivery services, which are extremely in strong demand. We're seeing a big uptick from large customers, and we expect that to continue as we go through the quarter, next quarter.

Yes. And I was going to say that I think the geography Puneet is largely in the U.S., but there are some global opportunities as well. It’s really non-COVID-19 related. I mean, this is part of the core growth strategy for Padraig’s business to continue to expand our market share on the Enterprise Services front. And we're really delighted that we made some big pharma deals.

Your next question comes from the line of Derik de Bruin with Bank of America. Your line is open.

So, a couple of questions. Very impressive margin expansion in the third quarter. How should we think about the operating margin into Q4? And then, I guess, how much of these costs are permanent removals versus what has to come back in '21?

Let me take that, Derik. It's great question and we certainly are very pleased with how the team has responded, as I mentioned before. As we talked about, a large amount of the cost, we have not done things like furloughs. We stabilized the team. We have not reduced base pay and things like that. So, these are discretionary expenses that a lot of them we think had the opportunity to stay away, be travel and things like that, which our digital tools have enabled us to really continue to support our customers. And so, there aren't any kind of one time things that happened in the quarter. In terms of going forward to Q4, we are looking at probably less of a margin -- incremental margin improvement because we are looking for ways to continue to invest to drive growth as the economy recovers. We also have some startup costs in the NASD new facility as well. So, it's probably less than what we've had historically had, which is call it 30% to 40% incremental. But it's really to drive growth.

Hey Bob, if I could maybe add a comment on your -- on the first remark. So, this is really, Derik, all about a new way of working in Agilent. So, I'm preparing for a manager's call later this week. And what we're talking to our team about is more digital, less travel. And we're really going to make sure that when we get on the other side of COVID-19 pandemic that we don't revert to our old ways of traveling. And we know from our customer satisfaction scores, they love the responses we have now with our digital platforms.

And two questions on LASG (sic) [LSAG]. I guess, the first question is, if you look at your numbers in China versus some of your major peers in that area, I mean, you really outshone in China. Can you just talk about just share dynamics there that are going on? I mean, as I said, there was a pretty stark comparison between you and your main LC competitor there. And I guess, also along those lines, can you talk about potentially any sign of a budget -- any sign of a budget flush into sort of thinking about 4Q trends? What are you hearing in terms of people with budgets? And are they going to be allowed to roll things over and to -- or are they going to have to use it or lose it? Just some dynamics in terms of growth on the fourth quarter and just sort of to your general thoughts on what customer spending habits are?

I'm going to have Jacob handle the first question. And Jacob, you can pass it back to Bob and I for the second question. And I know Jacob would be just delighted to talk about the share dynamics in China, which we think are very positive for Agilent?

Yes. Thanks for that. And the number speaks for itself. It's clear that both in China but I think actually globally that we right now will be taking care. And this doesn’t come like coincidence. We have been executing our strategy to make a deal over the past year. And the customers are really buying into our value proposition. We are playing a game where we are leveraging our whole portfolio, not going after one product line versus each other and the customer really likes that we’re outcome based. So that's what is happening right now. And we see here in the crisis that not only are they excited about the investments we have done over the past year, but also, as Mike talked about, in the digital world, into the work world, we have been very optimistic and super responsive they have taken off the digital, we take challenge variable very, very good and the customers responded very, very positive to it. They know that when they work with Agilent that we are there for them in this crisis.

And then, on the other question, Derek, what we're hearing from our customers, particularly in the public sector and we’re seeing it in our order book, and while I'll offer my perspective here, and feel free to build on my comments here. But, there's a real sense of making sure they commit to the budgets. So, we're seeing it both in our order book as well as order activity, where there is a lot of uncertainty what's going to happen post elections as we go into 2021. So, they want to commit those funds. And it's actually quite amazing the amount of deal activity that's going to occur without visiting a customer face to face. So Bob, I don’t know what you're hearing from field…

The only thing I would add is just reiterate what Jacob was saying, because it's not just China. I think, when you look at our LSAG portfolio, I think what people don't fully appreciate is, is how we've actually changed the portfolio to technology platforms, they're probably the best -- in the best shape they have been in probably five years in terms of new products and so forth. And I think you're seeing that across the globe. And when we think about where we ended up in Q3, LSAG was certainly the standout relative to where we thought they were going to be. In a capital constrained environment only down 4% on a core basically speaks to our responsiveness to customers.

Your next question comes from the line of Brandon Couillard with Jefferies. Please go ahead.

Bob, on the gross margin line, you mentioned higher logistics cost in the third quarter. Is that a new trend? And then, could you help us just think through some of the puts and takes, whether it's logistics costs or mix and how those puts and takes might evolve in the fourth quarter?

Yes. Sure. We’re hoping that's not a trend that's going to be around for a while, but it certainly was exacerbated in the Q3. That being said, I would say three quarters of that was probably mix, when you look at the various businesses across each one of the groups. But, where we saw logistics, challenges are, it's lower capacity and freight and air capacity. But we would expect that -- and we actually saw that through the quarter to kind of relax. And I think as you’re starting to see more intercontinental travel, both from a passenger standpoint as well as freight standpoint we would expect that to kind of relax over time.

Okay. And then, Bob or Mike, you're not quite giving formal forward-looking guidance yet, but you do feel comfortable enough to restart the buyback program. Just what are your latest thoughts just around comfort as far as capital deployment goes and maybe your appetite for M&A right now and what the funnel might look like there?

Yes. Sure, Brandon. And I'll start off here, and Bob, feel free to jump in. But, we felt quite comfortable resuming our share repurchase program on the non-dilutive perspective, and we'll be looking at opportunistic as well. And cash flow remains strong. We felt for some time that the third quarter of this year would be the toughest quarter for us for the year. We’re through that now. And the third quarter actually was significantly better than we had thought. And we saw positive growth across all the businesses in July. So, we think, okay, barring some kind of major flare-up, we should be able to continue to see this gradual improvement of growth in the fourth quarter, sort of our message. So, we have the comp. We also narrowed the framework that we provided, it’s more narrower than it was in Q3. But again, I think we need to keep in mind ourselves that we still -- there's still a lot of uncertainty associated with the pandemic. I think, our capital deployment approach remains unchanged, which is, we certainly wanted a balanced approach to capital deployment across dividends, cash, share repos and with the prioritization of investment in business, we just made a significant commitment in capital with our new NASD expansion. And we're still on the hunt for deals that make sense for Agilent. So, our approach to capital deployment really fundamentally remains unchanged. We paused a bit in the second quarter just because -- on the share repo because of the -- in the early part of the third quarter, given what was going on in the environment outside of Agilent. So, we feel pretty good about where we are right now and have a reasonable level of confidence, and there is decent level of stability about the business.

Your next question comes from the line of Dan Leonard with Wells Fargo. Your line is open.

So, maybe just to circle back…

Hey Dan.

Hi Mike. So, maybe this is a question for Bob, talking again about the Q4 framework. So, if your business grew in July and the world improves month to month through October, what does that imply then the high end should be above that 1% organic growth number?

It could be. I'll just leave it at that. There's still a lot of uncertainty and so forth. But certainly, we wouldn't complain if it was better than that.

Okay. And then, my follow-up, whoever wants to take it, on the NASD business. Can you elaborate on, what's the lead time for that announced expansion? Is it something that would take a year or multiple years to put in the new line, or is it a quicker turn? And can you comment on your willingness to commit capital inorganically in that business in addition to your organic commitments?

I'll take the first one just real quick. And then, Mike, if you want to add something on the second one. We announced that we would make that $150 million investment and we would expect it to go live towards the end of 2022. So, it's taking a little longer than just a regular train. Sam mentioned train A on steroids. So, it's bigger, and probably take a little more capital. And obviously with COVID-19 there's some activity there in terms of little long lead time. But, we feel like we have the capacity to be able to manage us through that time, and then that will come online at the end of 2020.

Yes. I think, it’s perhaps end of '22. And don’t specifically talk about specific targets or areas of focus, certainly, but it's not out of the realm of reason that I would say, why wouldn’t we want to further expand this business inorganically as well? So, that's not out of the realm. I'm not singling anything near-term happening. But we think we're operating from a position of strength here in this business. We had a first -- get our new factory up and running and build for that. So, we now think we have a, if you will, a beachhead to build from both, organically and inorganically.

Your next question comes from the line of Catherine Schulte with Baird. Your line is open.

I guess, first, despite the relatively good LSAG results in the quarter, it sounds like the outlook on the capital equipment side is still a bit uncertain. Can you just talk to how the services and consumable side of the business trended in July, and what your expectations are for instrumentation trends in the coming quarters?

Yes. I think -- Catherine, this is Bob, all three of our businesses actually performed better in July than they did in May and June, which was very positive. The ACG business actually led the charge in terms of that, as you would expect, given the resumption of activities. There's some catch up there, in terms of -- we saw that kind of phenomenon actually in China, in April. But ultimately ACG was there. I think, LSAG capital is going to continue to be constrained. But I think what we've seen in our business is we've talked about this in the past kind of this flight to quality. And with our instrumentation and the reputation that we have, I think in a capital constrained environment, those dollars are precious. And we think our positioning is very good vis-à-vis the market.

Yes. I tried to hit that in my remarks, which as I really say, hey listen, we know we're picking up share in a tight market. And I think you saw that on C&E, right, which is if a C&E capital purchase is going down, it's coming Agilent’s way. And that's why -- and the market is still cautious, but you see PMI starting to creep up a bit, so.

Yes, Catherine, just one last thing, to give you maybe a little more color. If we look across the groups, we would expect LSAG to still be negative in Q4. I mean, it's probably going to lag, given the [Multiple Speakers] big fourth quarter last year as well.

And then, Mike, you mentioned seeing growth in all regions for the non-COVID diagnostics business exiting the quarter. Can you just give us a sense of where those activity levels are in the U.S. versus China and where they bottomed out across the different regions?

Sure. So, I think, I’d say China is in lead position in terms of if you -- almost full recovery. Europe is second and the U.S. is trailing. So for the first -- throughout the quarter, if I look at Sam's business in the U.S., for example, the first two months were negative of diagnostic testing values in pathology. But we saw actually improvement to growth in July. So, I think that's sort of the pattern of how the pandemic has flowed around the world. China is back. Europe's on its way. And I'd say, U.S. is still in the early stages of recovery.

Yes. And I would say, in the U.S. it’s probably -- and keep me honest, Sam it’s -- we're probably still at about 80% pre-COVID levels from a diagnostics perspective, but improving where it was. It was below that at the beginning of the quarter, so. Does that sound, Sam?

It does.

Your next question comes from the line of Steve Willoughby with Cleveland Research. Your line is open.

Just one question for you. A lot of my other questions have already been answered. 90 days ago, you made a brief comment about potential onshoring back in the U.S. Just was wondering if there's any update on that at all?

Thanks, Steve. Happy to comment on that. I think, that's still going to happen. And these things take time. But, there's active discussion. And, by the way, I wouldn't say it's just confined I the United States. I mean, many geographies are now looking at the security of their supply chain, both in the pharma side as well as in the chemical marketplace where they're providing precursors into the APIs for the pharma chains. So, there's nothing significant to announce relative to the impact on business, but there does seem to be an overall trend in this regard. And I can say also from an Agilent perspective, we're working hard to make sure that our supply chain is secure as well. So, I think that the COVID-19 pandemic is a real wake up call to really some vulnerabilities in some aspects of supply chain. So, we're kind of working both sides of it, which are to ensure our own ability to deliver product under multiple scenarios, as well as we do see some market trends underway. Bob, I know you take a look at this pretty…

Yes. Just to build on that, we talked a little bit about earlier in the call. We would expect that to see some of that opportunity show in our order book. And that's probably more a ‘21 timeframe for revenue. I wouldn't expect any of that to happen in Q4, just given the kind of timing. But you're seeing it in multiple end markets in multiple regions. We think this is a trend that will continue.

Your next question comes from the line of Dan Brennan with UBS. Your line is open.

Maybe first question just on chemical and energy, obviously, you've already highlighted a few comments throughout the call. But just wondering if you can kind of walk through a little more color separate trends within that segment by customer in chemical and if it's worth seeing if there's going to be divergence here between chemical and A&P and R&M? And then secondarily, maybe just remind us of how much of that business is tied towards like QA/QC versus R&D and kind of what are we looking for to determine whether or not this down 10% begins to improve more reliably, or if it's going to save the slow steady progress that you believe?

Hey, Bob, why don't I make some initial comments, and then we can check our notes to see if I missed anything. But, I think unlike the last quarter, the mix here -- and I think both the chemical and the energy later side had about the same dynamics where both were down about the same, primarily on the instrument side. And on one hand, the chemical side of the business was really benefiting -- continues benefit from the low oil prices. But, some of their end markets are weak, whether be automotive or some of the other markets that they service are weak. Some of them are getting a little bit of help on COVID-19 related products. But overall, I'd say both, the chemical side, as well as the energy side of that are down about the same, but stable. And I have to say that Bob and I had talked to at some length about this in our last call. And our prediction at the time was we thought we were going to be in a stable situation relative to this. That wasn’t going to get any worse. That was sort of the question we were getting last call. So, I think we're really pleased to see that that came through this quarter. And we expect that eventually this thing will start to move back to grow. I think it's probably a 70-30 mix, where most of it’s in QA/QC. And that's why these facilities are running, albeit maybe not at full volume. So, QA/QC equipment will be needed as well as consumer services that go with it. So, they can only hold off the depots on that side for so long. There is an element of research. But I think in the chemical and energy space, the biggest driver for that is the QA/QC side of the business.

Yes. And the only thing I’d add, Dan is we would expect this, as you said, kind of steady slow progress going forward.

Okay. And then, maybe one different follow-up, I know -- a couple of questions on China. But maybe could you just go a little bit more into detail on what you saw in food and generics? Obviously COVID is impacting the globe and the recovery. But, you've got some pretty unique issues with food and generics that are maybe a little different. So, dependent upon the improvement or lack thereof, that could drive notable changes in China. So, what did you see there? And what's the outlook as we look forward to those segments?

Yes. I was going to say, Dan, one of the things we were incredibly proud of in China was all three of the business groups grew and all of our end markets grew, really led by food, which was up over 20%. It's been a while since we've been able to say that. And so, we think that -- we talked about kind of the moves away from the government labs or the central labs into the commercial labs, and we think that that's stabilized, and team has really been able to garner share, or our view of capacity in that space. And then, in pharma, it continues to perform very well. Actually, pharma was up roughly 10% in China, and that's a combination of both, large and small molecule. And I think that our thesis around that continues to play out, which is that the winners of the 4 plus 7 or the tendering process are -- customers that where we are over indexed, and we continue to see that positive momentum, we actually saw acceleration from Q2 to Q3 in both, food and pharma, and the rest of the businesses were positive as well. So, I think, it’s broad-based.

Your next question comes from the line of Patrick Donnelly with Citigroup. Your line is open.

Mike, maybe just one for you on -- I know, there’s been a few questions in July obviously. But with all the businesses returning to growth, I guess, is it safe to assume you guys didn't see too much of a pullback around the second wave here in the U.S., even the first few weeks of August? It sounds like you're a little more cautious on Americas versus other geographies. But, just wondering, any surprises on an end market basis in the U.S., as you went through July and even early August, given the reoccurrence of virus?

No, I'll jump in on this. But from our perspective, I don't know real surprises. Maybe we're -- like all of us are watching what was happening with the pandemic as it worked its way across throughout the U.S. and we saw the case numbers go up and lab access was down really sharply April, May, June and we started seeing some recovery. So, I think no real surprises versus what we thought.

Yes. I would agree. I mean, Patrick, this is Bob. The Americas, as Mike said earlier, is in fact the biggest variable because it's further along in its recovery than both Europe and China. And I think, the thing that we're watching is those COVID flare-ups and the potential impact on elective procedures, which would impact our diagnostics business. That's probably got the biggest variability going into Q4 relative to LSAG and ACG. But, to Mike's point, we did not see any significant change with these flare-ups in August -- or excuse me in July and early August.

And then, bunch of that good commentary on the chemical and energy and industrial side. Just want to and just clarify, I mean it certainly seems like the industrial sentiment feels like it might have bottomed. It seems like your tone is little bit better from three months ago. Even though, again, chemical and energy is probably going to be down similar this quarter and again next quarter. But, I guess what you're hearing from customers there on spend plans? Again, it sounds like you're a little more optimistic and talking a little more bullishly about '21. So, I'm just wondering, I guess, as we enter into the end of this fiscal year into '21, are you seeing things improve a little bit? Obviously, you’ll come up against very easy comps, but it does seem like the tone is a little more positive. So, are you hearing from customers, things that are trending a little bit better into '21?

Yes. I think that's a fair assessment of what I was trying to communicate today. First of all, the fact that we do think it's bottomed. And that was our thesis when things started going directly down and the pandemic hit. So, we do see that. Again, I don't want to get too far out and describe some big dramatic increase in growth in this space. But, customers are working on the plans. Chevron actually is making some big investments in Iraq. So capital -- these are ongoing concerns, and they can hold back their capital for a while, but they're going to want to maintain their operations at the highest capabilities. So, we're hopeful that the budget environment will be a little bit different in '21. I think once we get a little bit more clarity, once our customers feeling more clarity in their view where the economy's gone, then they can make their decisions with a lot more confidence. So, the PMIs are good view of how some of them may be changing. So, again, don't over interpret this for fourth quarter, but it does point to '21 being perhaps a better environment.

And your last question comes from the line of Jack Meehan with Nephron Research. Your line is open.

So, I wanted to go back to the NASD business and just get a little bit more color. Are you working on any of the mRNA-based COVID-19 vaccine? I guess, curious because the trials are going so quickly. I was curious to get your take if one [indiscernible] and into commercial within the next six months, how would you manage the business to deliver on the capacity that customer might need for that?

Hey, Sam, I’m going to pass that to you.

Yes. no problem, Mike. So, I can't comment specifically on the molecule or the molecule of the projects that we're doing related to COVID-19. But, two things I will point out. As Bob indicated earlier, this is business separate for or different than the business we're already doing or it's not taking the place of business, if you will. And we believe, we have the capacity and that's -- if the demand is there related to certain things playing out related to COVID-19 and the molecule that we happen to be working on, we believe we will be in a position to be able to supply that material as the volume required.

And then, one more follow-up on LSAG. I'm just curious, as you're looking at the research labs around the globe, kind of in this conversation around deferral versus cancellation, what are customers telling you? Is it still mostly deferrals versus cancellations? And on the deferral side, when do you expect these, how far out is it getting pushed something that you think it hits before the end of the year or probably more likely in calendar '21?

Hey Jack. Happy to answer this question. This is something we've been monitoring pretty closely, deferrals versus cancellations. And we've really been pleased, our cancellations are actually lower than last year. And our thesis is they’re being pushed and actually funds will be deployed this calendar year.

Yes. That's what we actually -- we saw that -- Jack, some of that actually happened in Q3. And as people are going back into the labs physically there, then they can install the instrumentation. But to Mike's point, we've seen no cancellation or lower cancellations than what we would have last year. There's always some level of it. I would say that we've been extraordinarily pleased. And I would expect it to happen this calendar year.

This concludes the allotted time for our question-and-answer session. I'd now like to turn the call back over to Ankur for any closing remarks.

Yes. So, that concludes the call for today. Thanks, everyone for joining us.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.